In the US, Rich States Spend Less on Welfare

As I've noted in the past , when it comes to government spending on social welfare programs, the United States is hardly the free-market, libertarian "paradise" many social democrats suppose it to be. When we look at social spending as a percentage of GDP, the US is similar to Switzerland, and the US spends more on social benefits than Australia and Canada.

The US's welfare spending totals nearly one-fifth of the nation's GDP, and is hardly far outside the norm when compared to the "welfare states" of Western Europe and the Anglosphere.

When it comes to the United States, however, it is often problematic to reduce the nation to any single statistics because the United States is so huge. After all, when comparing the US to European nations, the US — with more than 320 million people — is many times larger than the next largest country, Germany, which has only 82 million people.

Because of its enormous size, sizable variations across different states and regions. And many of these US states are themselves larger than numerous European countries.

So, in order to provide a little more insight into how large the welfare state is in the United States, I've broken out social spending by state, and then compared it to each state's total GDP — so as to be more comparable to the OECD's measure.

State and Local Social Spending

In the United States, social spending is complicated by the fact so much of it comes from both federal spending and from state and local spending. In terms of sheer dollar amounts, federal spending predominates because the amount of taxpayer money spent on Social Security, Medicare, and Medicaid is so enormous.

State governments, however, have very limited control over most of this federal spending. So, in order to get a sense of how different state governments view social spending, it is first helpful to look at just the state and local social spending over which state and local policymakers have actual control. At the local level, most of this is public school spending, and at the state level, state governments spend on a variety of health and poverty-relief programs above and beyond federal spending.

When calculated as a percentage of GDP, we find that social spending ranges from seven percent (in Nevada) to 16 percent (in Mississippi)1:

In this case, I'm adding together state spending on k-12 education, higher education, "public welfare" and "health and hospitals." This does not include state spending on roads, police, etc.

State, Local + Federal Social Spending

State and local spending, however, are just a fraction of total welfare spending that occurs in each state. If we add in federal transfer payments, such as Social Security and Medicare, the percentages are naturally much higher2:

By this measure, spending on social programs ranges from 35 percent to 16 percent.

What we find is that some of the nation's lowest-income states also have some of the highest levels of social spending by government.

"Well, that makes sense," some might say. "States with more poverty naturally tend to have more social spending on poverty relief." Other observers might also note — correctly — that states with lower welfare-spending levels also tend to be states with larger urban centers where more productive workers contribute to higher GDP numbers. Thus, GDP levels are higher meaning social spending ends up being a smaller percentage of total GDP.

I am inclined to agree with all of this. But this line of reasoning also contradicts what we are repeatedly told when politicians like Bernie Sanders compare the US welfare state to foreign welfare states.

Does More Social Spending Lead to a Higher Quality of Life?

For example, Americans are repeatedly told that the key to a high "quality of life" is to have high levels of social spending. After all, Scandinavian countries like Sweden, Denmark, and Finland have some of Europe's highest levels of spending on social benefits. We're also told these countries are the happiest places on earth.

While the US and Canada spend "only" 19 percent and 17 percent, respectively, on social benefits, Finland and Denmark spend 30 percent and 29 percent, respectively. All of these countries are fairly high income countries. But when politicians talk about Scandinavian countries' sizable welfare states, they often jump to the conclusion that these large welfare states are the reason for the countries' high quality of life.

Declaring a cause-and-effect relationship from this correlation, however, is quite unwarranted. We can see this when we compare US states, and it is apparent that states with more social spending can hardly be declared to be examples of astounding economic success. In fact, the opposite appears to be true. In the US, some of the richest states — including states with some of the lowest poverty rates such as Utah and Minnesota — have relatively low levels of social spending.

Moreover, many of the states with lower levels of social spending perform better in terms of so-called "quality of life" measures. That is, low-spending states like Washington, Massachusetts, Utah, and Colorado tend to have lower crime rates, and higher life expectancy.

Yet, in the international context, we're told that the key to a high "quality of life" is an ever-more robust welfare state.

The truth, though, is that high levels of spending on social benefits have precious little connection to rising standards of living, high life expectancy, or any other quality of life measure.

The real key to health and happiness, whether we're talking about American states or European countries, is an open economy that fosters trade, capital accumulation, entrepreneurship, and basic protections of private property. Moreover, wealthier states and wealthier countries are usually just places that have been doing this longer. Sweden, for example, is a relatively rich country because it has enthusiastically embraced markets and market-based reforms at various intervals over the past century. Sweden's huge welfare state has been an impediment to this, but not enough of an impediment to erase the gains made by markets. Western Europe is wealthier than Eastern Europe because it has been fostering capital accumulation for much longer than Eastern Europe has. Moreover, much of the capital in Eastern Europe was destroyed by the soviet-era communists, and countries that have experienced this sort of thing tend to never catch up to the rich countries who did not have similarly damaging regimes.

Similarly, states like New Mexico and Mississippi — which have high social spending but low incomes and high poverty — are poorer either because they tended to have low-productivity rural economies, or their economies were devastated by the American Civil War. The effects are still apparent today.

1. State spending data is provided by the Tax Policy Center for fiscal year 2015. The spending categories used here are a total of the categories "elementary and secondary education," "higher education," "public welfare," and "health and hospitals." This information is then calculated as a proportion of statewide GDP as provided by the US Bureau of Economic Analysis. GDP data is from 2017. See: https://www.taxpolicycenter.org/statistics/state-and-local-general-expenditures-capita and https://www.bea.gov/data/gdp/gdp-state

2. The added fedeal spending totals are provided by Pewtrusts.org in the report "Federal Spending in the States 2004 to 2013," Table 1, "How Much Did the Federal Government Spend in Your State?" I have included the categories, "retirement benefits" and "non-retirement benefits." These total are then added to the state and local totals, and calculated as a proportion of the BEA's statewide GDP numbers. See: https://www.pewtrusts.org/en/research-and-analysis/issue-briefs/2014/12/federal-spending-in-the-states and download "state-by-state distrubution."